Why regulations fail? Environmental regulations, bargaining power, and strategic-political CSR in China

Strict regulations are usually regarded as valid tools for government to pursue sustainable development, while clear evidence is required to answer how the polluting firms actually respond to them, especially in the emerging markets with imperfect institution. With the data of 2848 Chinese A-share listed firms, this paper takes the enforcement of China's New Environmental Protection Law (NEPL) as an exogenous shock, and utilizes the difference-in-difference and tripe difference models to investigate how polluting firms strategically respond to strict environmental regulations. The results show that facing the pressure of NEPL, the polluting firms tend to pursue the community-related corporate social responsibility (CSR) as a strategic-political CSR, rather than fulfill environmental responsibility obediently. Significantly, the strategy obviously varies for firms with different bargaining power with local governments and mainly works for the state-owned firms, large taxpayer or large employer, while the non-state-owned or small firms would still pursue environmental compliance as required. Though does crowd out the environmental performance, more strategic-political CSR engagement, instead, shelter firms from environmental penalty while benefiting other stakeholders. This paper helps understand the motivations and outcomes of regulated firms' strategic response to strict environmental regulations, which is particularly relevant to not only China, but also other emerging markets with similar government intervention and passive CSR fulfillment.